The Fed’s surprise discount rate cut by 50bps is reason for panic - by longs and shorts. I am not going to downplay that this is a bullish catalyst for the market. However, there are numerous reasons why this is a symbolic move more about investor sentiment and more about Fed credibility than actually solving the systemic problems. Despite the 50 bps cut and extended maturity dates, this tool of the Fed has limited use by the actual parties that can borrow at the discount window. Note that the banks have shown almost zero appetite for borrowing in the past and the new rate is still 50 bps above the Fed Funds Rate.

Let’s say that you’ve been trying to sell Kool-Aid on the street corner for years and no one stops because you are $1.00 higher than what they could get at the store. Do you think the Kool-Aid tastes any better if it drops to only $0.50 higher than the store? It will be interesting to see whether this move actually changes behavior at the banks. Or if it only changes sentiment and behavior at the stock market. If that is the case, then the Fed has addressed the stock market and not the banks. If that is the case, the Fed bailed out the stock market and not the troubled borrowers. If that is the case, the Fed has conveniently avoided the Moral Hazard problem for now, because the Moral Hazard has to do with the banking system and not the equities.

The timing of this action in the premarket shows that the Fed is following the markets. They know how volatile the futures markets can be and doing this 1 hour before stocks open has maximum effect for changing stock market sentiment. I am not so sure how this particular timing changes the actions of the banks. Would the banks feel better and borrow from the Fed more if the timing was at 3:00 am or 6:00 am? On a Friday morning - good one - on an options expiration day - awesome. If the timing was accidental, then Chairman Bernanke and the Fed are the kind of people that are always in the right place at the right time.

So Calm or Panic? Who was calm yesterday and the preceding days? Who is calm today? If being calm is what the bulls valued yesterday do they value it today? It is easy to panic in either direction. Neither usually turn out too well.